Competition with a capital 'C'

Thanks to the Telecommunications Act of 1996, the rapid rise of new technologies and the support of large investors, competitive local exchange carriers are forging a major presence in the country's local phone service markets.

CLECs pose a fast-moving target, difficult to stereotype or count. But by taking stock of the state of the CLEC market today, industry watchers and prospective partners can get an idea of how CLECs are able to apply advanced network technologies and service techniques to the advantage of enterprise customers-and to the benefit of long-distance carriers and Internet service providers.

CLECs come in a range of sizes and feature a variety of business styles and operating models. Generally, they fall into three basic segments:

* Tier 1: subsidiaries of incumbent carriers-well-established companies such as Brooks Fiber or Teleport Communications Group, which has been acquired by AT&T;

* Tier 2: large, publicly traded independents-companies such as Intermedia Communications, Hyperion and WinStar, many of which offer dial-up and dedicated access in multiple states;

* Tier 3: privately held start-ups-companies such as Interpath Communications, Global NAPs and 2nd Century, which are bundling alternative services in local markets and which may emphasize consumer-oriented business models.

Estimates of the numbers of CLECs operating in the U.S. vary between 1000 and 1500, but one thing is certain: The CLEC market is growing and changing quickly. Before 1996, CLECs barely existed. Today they possess an estimated 1% to 3% of the $180 billion North American telecommunications market; within two to three years, that could grow to 15%.

Moreover, the CLEC market is highly dynamic. Mergers, acquisitions and multibillion-dollar start-up funding characterize today's CLECs. Because the stakes are so high, these dynamics are likely to continue as the CLECs take a greater share of the fast-growing telecom market.

Differentiated by facilities, services CLECs are gaining market share because they spend much of their start-up capital on state-of-the-art backbone facilities. Many are laying fiber optic networks based on asynchronous transfer mode and Sonet, handing off T-1, T-3 and OC-3 connections to ISPs and long-distance carriers, and offering advanced digital subscriber line services to enterprise customers.

And while most CLECs act as Internet access distribution resources, some do business in private data networking for the WAN. Such companies might connect a dozen sites together within a local area, then offer frame relay or ATM services at greatly reduced pricing.

To be sure, not all CLECs own their facilities-many today are reselling full services or just bandwidth leased from incumbent LECs. But the majority of successful CLECs-and success can be determined via analysis of FCC records-build their own networks. Those CLECs that do not own their networks, lease transmission facilities but own the equipment collocated in incumbent LECs' CO or in their own points of presence (POPs)-and the trend for CLECs is clearly in those directions.

Because they own advanced networks and because they are relatively unregulated, CLECs can frequently offer more services to enterprises, long-distance carriers and ISPs at lower rates than incumbent LECs. Many CLECs are able to offer both IP telephony/fax and circuit-switched voice services to customers within a single bundled package. That way, they can sell multitier quality of service (QOS) services, letting the user decide which calls are important enough to warrant top-quality service, and which calls may be made less expensively over IP networks.

But to the banks, reservation centers and other small businesses they're likely to attract, their appeal goes well beyond telephony cost savings.

Until now, such a small business would have had to deal with an incumbent LEC for phone service, a separate company-or at least a separate division-for Internet access, and another provider for long-distance. Unlike the highly regulated incumbent LEC, the CLEC can bundle services, and so it can offer single-point outsourcing of these and more services-remote a ccess servers to branch offices, private dedicated networks, even virtual private networking with full security.

Leveraging network architecture Many CLECs compete not just through new services, but through the network architecture they employ to deliver these services. For instance, CLECs increasingly choose decentralized network infrastructures with intelligence distributed to end points in favor of antiquated hierarchical topologies with T-1 and T-3 lines that terminate centrally via CSU/DSU racks and M13 multiplexers (Figure 1).

A distributed network architecture may use ATM switches or Sonet multiplexers in the core backbone and employ a variety of intelligent access devices in the edge POPs. These include remote access concentrators, broadband access concentrators, gigabit routers and high-performance Layer 3 switches with central office network access point functions. The remote access concentrators and broadband access concentrators accumulate dial and leased-line traffic, then pass it over the backbone with minimal involvement by core switches.

This type of architecture offers fundamental resiliency because a distributed topology is inherently less vulnerable to catastrophic failure. But it also puts the processing power near the edge of the network cloud, where key services such as QOS, service level agreements and virtual private networking (VPN) tend to be activated.

Valuable today, the distributed architecture will become even more important in the near future as public network/IP interoperability advances through products built to leverage and implement SS7 gateways. They will play key roles in public network/IP address translation. In a centralized system, for instance, a phone call would come into the network via an unintelligent line concentrator, which would send the call on to the central processing switch (Figure 2). At the backbone, the processing switch would decide whether to send the call along the public network, or divert it to an IP network, based on the call's routing information.

In a distributed intelligence network, that routing decision would be made by the first point of entry, the intelligent remote access concentrator or broadband access concentrator. Here, the decision whether to route the call through an SS7-enabled IP gateway or to continue it through the public switched network, when made at the network's edge, could save time and reduce the complexity associated with the call. Moreover, it would cut down on backbone traffic, preserving backbone bandwidth and improving resource usage, because that traffic does cross the backbone.

Internet advantages Not only are CLECs good at competing for end users, they are adept at passing their advantages on to other infrastructure players-the long-distance carriers and ISPs-in a variety of ways.

The first is cost. In terms of the access charges that long-distance carriers must pay to local providers, CLECs are having a major effect. Traditionally, long-distance carriers have had to pay 50cents on every dollar to the local incumbent LECs in order to move traffic through the local networks. Not only are CLECs likely to undercut the incumbent LECs, but they may help to change the entire long-distance/local business model by forging agreements for mutual traffic exchange with long distance carriers.

Second, CLECs have the potential to serve as local extensions to long-distance carriers' networks. The CLECs give the carriers highly advanced local network facilities. And in many cases the carriers give CLECs the value of their major brand names-an important consideration for sales to larger end user customers. For ISPs, CLECs deliver high-performance network infrastructure, capable of supporting DSL services. They also offer data-transport expertise-and profit-making experience-gained in their executives' previous lives in the competitive access and long-distance industries. Because of this, CLECs make excellent partners for ISPs. While the ISP brings deep technical competency to a partnership, the CLEC brings transport knowledge plus the ability to compete through value-added services-not to mention the experience of fighting hard in an industry that's traditionally been rough and tumble.

In addition, CLECs are starting to strike deals with the Bell companies to carry each other's traffic. These agreements will serve as great ways for inter- and intraregional long-distance traffic to travel at low costs to compete effectively with interexchange carriers.

CLECs are also helping cable companies enter the Internet access markets as well as the IP telephony space. CLECs serve as wholesalers of access for voice and data.

Finally, CLECs benefit end users and wholesale buyers alike. They promise to shake up the local exchange industry in precisely the way that was intended by the telecom act; that is, to bring a new level of competitiveness to the local exchange market.

Add together their substantial funding, comprehensive transport knowledge, ability to build facilities from the ground up and willingness to merge and partner with other players, and it is apparent that CLECs promise to bring a new level of excitement and dynamism to the business of telecommunications.